2014_04_08_isp_the fragrance of cash

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IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.

Intesa Sanpaolo

08 April 2014 Banks Change in Recommendation

The fragrance of CASH Andrea Filtri

Equity Analyst

Upgrading ISP to Neutral, 2015E Target Price to €2.6

We upgrade ISP to Neutral (from Underperform) and raise the Target Price (TP)

to €2.6 (from €1.2) following Q413 results and the 2014-17E Business Plan (BP)

presentation. We see ISP as a strong investment case made of: a) RoTE re-rating

from Italian macroeconomic normalization; b) high operating leverage (46% C/I);

c) 5% average yield in a back-ended plan to return €10bn cash to shareholders

through 76% average payout ratio into 2017E. ISP trades on 1.1x 2014E TE, in line

with the European cash cows’ P/TE vs RoTE tradeoff. We estimate a Business

Plan 2015E fair value of €2.77, implying a single digit premium to our TP.

Q413 a tough cleanup quarter: poor NPL trends but 1.5 p.p. higher coverage

ISP posted €5bn loss in Q413 from heavy one offs: €5.8bn goodwill devaluation,

LLPs 2x the avg. quarterly charge, €2.4bn gains on stake sales/revaluations. 30%

QoQ increase in gross NPL flows is bad news, but potentially partly reflecting the

AQR’s effects. Nevertheless, cash coverage rose to 46% up 1.5 p.p. QoQ.

€4.5bn 2017E profit target – MBE 8% below: lower fees, better NII and costs

ISP targets 11.8% 2017E RoTE from 46% C/I ratio, LLP normalisation (77bp) and

3.3% loan CAGR. We estimate the Plan’s assumptions are conservative on rates

evolution (+25bp) and LLPs, less so on underlying volume growth (5.1% CAGR)

and NII (7% CAGR), after adjusting for the decay of non-core loans, carry trade

and deposit hedging. MBe stand at 8% discount to targets from better costs and

NII offset by lower fee income (3.2% vs 7% CAGR). Optimistic/pessimistic

scenarios explain c.2 p.p. higher/lower swing to 2017E RoTE targets.

5% avg. annual yield but potential regulatory risk cannot be ruled out

ISP targets €10bn dividends: €1bn in 2014E and growing €1bn each year. This

implies a staggering 76% average payout ratio, keeping c.12% CET1 ratio. ISP’s

dividend commitment is exponential, with payout close to 100% in 2017. This

could potentially attract the attention of regulators, still focused on propping

banks’ capital up. This has been the case for Swiss and US banks so far. ISP is the

highest payout target among EU cash cows (1.5x above the 48% avg) with in-line

CET1 ratio, below-average RoTE and 1.5x better leverage ratio. We see some

risk to a portion of the dividend target and to extra dividend temptations, at

least until the regulatory framework will have stabilized. We calculate ISP’s

excess capital could support up to €95bn additional RWA, implying a potentially

long list of EU bank targets to transform both profile and the investment case.

ISP vs UCG: „the beautiful game‟ – Cash and capital vs higher, cheaper growth

In tribute to the upcoming World Cup, we simulate a ‘no-holds-barred’ match

between ISP and UCG, following their new Business Plans. We see ISP starting

fitter and with sounder capital and stronger defense from the cash back

commitment. UCG’s slow start - Q413 €9.5bn LLP cleanup, lower capital and

future payout - would turn into a strong comeback, courtesy of its 4-striker

tactic: 1) higher NPL coverage; 2) higher RoTE re-rating potential from non-core

to core capital redeployment; 3) higher growth potential; 4) cheaper valuation.

Only ISP’s reliance on the championship quality of its operating leverage and

rate sensitivity provides an equaliser deep into a breathtaking extra-time.

+44 203 0369 571

[email protected]

Antonio Guglielmi

Equity Analyst

+44 203 0369 570

[email protected]

Andres Williams

Equity Analyst

+44 203 0369 577

[email protected]

Source: Mediobanca Securities

Price: € 2.55 Target price: € 2.60 Neutral (from Underperform)

2013 2014E 2015E 2016E

EPS Adj. (€) 0.00 0.14 0.20 0.23

DPS (€) 0.05 0.06 0.12 0.18

TBVPS (€) 2.25 2.32 2.39 2.43

RoTE Adj. (%) 0.2% 6.1% 8.4% 9.7%

P/E adj (x) nm 18.4 12.9 10.9

Div.Yield(%) 2.0% 2.4% 4.8% 7.1%

P/TBV (x) 1.1 1.1 1.1 1.0

Market Data

Market Cap (€m) 39,608

Shares Out (m) 15,508

(%)

Free Float (%) 100%

52 week range (€) 2.59-1.17

Rel Perf vs STOXX EUROPE 600 (%)

-1m 11.6%

-3m 33.0%

-12m 90.4%

21dd Avg. Vol. 153,535,697

Reuters/Bloomberg ISP.MI / ISP IM

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Intesa Sanpaolo

08 April 2014 ◆ 2

Neutral (from Underperform)

Table of Contents

Valuation Matrix 3

Upgrade to Neutral: a solid case with back-ended cash 4

Q413 cleanup 6

MBe 8% below 2017E targets from lower fees 10

€10bn cumulative cash back means 5% avg. yield 13

Generous cash back policy vs potential regulatory risk 15

ISP vs UCG: ‘the beautiful game’

18

Affordable shopping list

20

Divisional estimates

22

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Intesa Sanpaolo

08 April 2014 ◆ 3


Valuation Matrix



Profit & Loss Acc(€ m) 2013 2014E 2015E 2016E Multiples 2013 2014E 2015E 2016E

Net Interest Income 8,132 8,194 8,734 9,267 P/E nm 18.2 12.8 10.7

Growth (%) -13.8% 0.8% 6.6% 6.1% P/E Adj. nm 18.4 12.9 10.9

Non-Interest Income 8,163 8,224 8,429 8,657 P/Net Op.Income 5.0 4.9 4.5 4.2

Growth (%) -3.4% 0.8% 2.5% 2.7% P/Revenues 2.4 2.4 2.3 2.2

of which Fee Income 6,149 6,389 6,569 6,774 P/TBV 1.1 1.1 1.1 1.0

of which Financial Income 1,161 903 932 932 P/Total Deposits (%) 10.8% 10.6% 10.4% 10.2%

Total Income 16,295 16,418 17,164 17,925 Yield (%) 2.0% 2.4% 4.8% 7.1%

Growth (%) -8.9% 0.8% 4.5% 4.4%

Total Costs -8,352 -8,284 -8,366 -8,439

Growth (%) -6.3% -0.8% 1.0% 0.9%

of which Personnel Costs -4,827 -4,906 -5,033 -5,154

Net Operating Income 7,943 8,134 8,797 9,486

Growth (%) -11.4% 2.4% 8.2% 7.8%

Provisions&Write-downs -7,445 -4,221 -3,478 -3,289 Per Share Data (€) 2013 2014E 2015E 2016E

Extraordinary Items -6,171 -258 -236 -236 EPS -0.29 0.14 0.20 0.24

Pre-tax profit 2,489 3,927 5,301 6,175 EPS growth (%) nm nm 42.0% 19.8%

Tax -875 -1,504 -1,986 -2,247 EPS Adj. 0.00 0.14 0.20 0.23

Tax rate(%) 35.2% 38.3% 37.5% 36.4% EPS Adj. growth (%) -97.2% 3,738.9% 41.9% 19.1%

Minorities and others 7 5 3 3 TBVPS 2.25 2.32 2.39 2.43

Net profit -4,550 2,171 3,083 3,695 DPS Ord 0.05 0.06 0.12 0.18

Growth (%) nm nm 42.0% 19.8%

Adjusted net profit 60 2,285 3,243 3,861

Growth (%) -97.2% 3,739.4% 41.9% 19.1%

Balance Sheet (€ m) 2013 2014E 2015E 2016E Key Figures & Ratios 2013 2014E 2015E 2016E

Customer Loans 343,991 352,853 364,490 376,519 Avg. N° of Shares (m) 15,508 15,508 15,508 15,508

Growth(%) -8.7% 2.6% 3.3% 3.3% EoP N° of Shares (m) 15,508 15,508 15,508 15,508

Customer Deposits 366,941 374,029 381,276 388,687 Avg. Market Cap. (m) 22,887 39,608 39,608 39,608

Growth(%) -2.8% 1.9% 1.9% 1.9%

Shareholders' Funds 44,515 45,686 46,768 47,463 NII/Total Income (%) 49.9% 49.9% 50.9% 51.7%

Minorities 543 543 543 543 Fees/Total Income (%) 37.7% 38.9% 38.3% 37.8%

Total Assets 626,283 638,883 649,817 658,535 Trading/Total Income (%) 7.1% 5.5% 5.4% 5.2%

Cost Income ratio 51.3% 50.5% 48.7% 47.1%

Personnel costs/Total costs 57.8% 59.2% 60.2% 61.1%

NPLs ratio 16.3% 17.6% 17.4% 15.1%

Provisions/Loans 18.45% 19.08% 18.53% 17.94%

RoTE Adj. (%) 0.2% 6.1% 8.4% 9.7%

ROA (%) -0.73% 0.34% 0.47% 0.56%

Tier 1 ratio 11.6% 11.9% 11.9% 11.7%

Basel III Core Tier 1 ratio 12.1% 12.4% 12.4% 12.2%

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

A M J J A S O N D J F M

Intesa Sanpaolo STOXX EUROPE 600

7/04/14

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Intesa Sanpaolo

08 April 2014 ◆ 4


Upgrade to Neutral: a solid case with back-ended cash We upgrade ISP to Neutral (from Underperform) and raise the Target Price (TP) to

€2.6 (from €1.2) following Q413 results and the 2014-17E Business Plan presentation.

We see ISP as a strong investment case made of RoTE re-rating from Italian

macroeconomic normalization combined with high operating leverage and 5% average

yield in a back-ended plan to return €10bn cash to shareholders through a staggering

76% average payout ratio. We see ISP trading on 1.1x 2014E TE, in line with the

European cash cows’ P/TE vs RoTE tradeoff. We estimate a 2015E fair value of the

Business Plan targets of €2.77, implying a single digit premium to our Target Price.

Upgrade to Neutral (from Underperform) – Target price to €2.6 from €1.2

We upgrade ISP to Neutral from Underperform following Q414 and the new 2014-17 Business Plan

(BP) presentation. We see ISP proposing a strong investment case made of:

Cash back: €10bn cumulative dividends over the BP deriving from the solid capital level;

Pure play on Italy: ISP offers exposure to the potential Italian macro economic recovery;

Operating leverage: 46% 2017E C/I ratio makes ISP the Italian bank with the highest

operating leverage, hence where new earnings should filter more easily to the bottom line.

We set our new €2.6 2015e Target Price based on our sum-of-the-parts valuation methodology (see

Table 1). This values ISP at €35bn by attaching a P/TBV multiple to each of the businesses of the

group based on the over the cycle ROAC vs the cost of capital of each business. On top, we value

excess capital – calculated as CET1 minus the capital allocation by business following the MB

methodology - at 1x TBV.

The increase in Target price derives from:

1) An increase in the over the cycle ROAC assumptions as we gain more visibility on future

earnings evolution and lower funding costs;

2) The reduction in the COE to 9.9% derived from the reduction in the Italian risk free rate

(3.25%);

3) The roll over to 2015E.

Our TP implies 1.2x 2014E TE valuation, i.e. discounting a future double digit RoTE.

Table 1 – ISP 2015E sum of the parts valuation

2015E PBT Net profitC.C. Adj

profitRWAs

MB capital

/RWA

Allocated

capitalROAC

Over the

cycle ROAC

Cost of

capitalP/TBV Value

BdT 4,297 2,601 1,670 118,926 9.5% 11,298 14.8% 16.0% 8.8% 182.9% 20,659

CIB 2,052 1,331 854 96,359 10.0% 9,636 8.9% 9.0% 10.4% 86.5% 8,339

CEE 557 374 240 28,914 12.0% 3,470 6.9% 10.0% 12.6% 79.7% 2,765

Fideuram 550 304 195 5,476 10.0% 548 35.6% 40.0% 9.9% 406.1% 2,224

Eurizon Capital 305 193 124 714 30.0% 214 57.9% 50.0% 9.9% 507.6% 1,087

C.C. -2,459 -1,720 -1,104 38,823 3,882

ISP group 5,301 3,083 3,083 289,211 10.0% 35,073

Basel 3 Capital surplus/deficit 7,025

Per share 2.60


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Intesa Sanpaolo

08 April 2014 ◆ 5


ISP P/TE vs RoTE is in line with Europe’s cash cows

Chart 1 shows the map of the P/TE vs RoTE of the main European cash cow banks. For ISP and UCG

we use 2017E RoTE to capture their higher re-rating potential from a normalisation of external

factors. We see ISP trading in line with the peer average in terms of P/TE vs RoTE.

Chart 1 – P/TE 2014E vs 2016E RoTE for Europe’s cash cows

INGCA

KNISP*

UCG*

CABK

NDA

BNP

SG BAR

LLOYBBVA

SAN

HSBC

SWEDA

SEBSHB

PEERS

.6x

.8x

1.x

1.2x

1.4x

1.6x

1.8x

2.x

2.2x

10% 11% 12% 13% 14% 15% 16% 17% 18% 19%

P/T

E 2

014E

2016E RoTE

Source: Mediobanca Securities, company data * 2017E ROTE

High single digit upside from discounting future dividend cash flows

Table 2 shows a sensitivity from the inclusion of the NPV of future dividends (COE as discount

factor) into the value of ISP. The simulation values ISP’s annual TE at 1.0x derived from 10.3%

2017E RoTE vs 2014E 9.9% COE, implying we are already discounting double digit ROTE expected in

three years time. To this, we add the NPV of the future dividend streams, at 2014E, 2015E, 2016E.

Finally, we value ISP on 2015E at the P/TE multiple implied by the 11.8% 2017E RoTE target of the

BP. The result is a single digit swing (up and down) vs the current share price, implying the market

is discounting c.50% of the NPV of the future dividends, in our view. We see €2.77 as the value of

ISP in 2015E and our TP positions at 6% discount, in line with our discount to EPS.

Table 2 – ISP CET1 ratio evolution and excess capital indications

Valuation 2013 2014E 2015E 2016E 2017EUpside to

current price

ISP dividend stream 822 1,000 2,000 3,000 4,000

RoTE 5.7% 7.8% 9.2% 10.3%

COE 9.9%

P/TE (2017E RoTE / 2014E COE) 104.1%

ISP value per share 2014E incl. NPV of dividends 2.35 1,819 2,483 3,011 -7%

ISP value per share 2015E incl. NPV of dividends 2.46 2,729 3,310 -3%

ISP value per share 2016E incl. NPV of dividends 2.75 3,639 8%

ISP value per share 2015E incl. NPV of dividends

and 2017 RoTE target2.77 9%

Source: Mediobanca Securities, company data

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Intesa Sanpaolo

08 April 2014 ◆ 6


Q413 cleanup ISP posted €5bn loss in Q413 from heavy one offs: €5.8bn goodwill devaluation, LLPs

2x the average quarterly charge, €2.4bn gains on stake sales/revaluations. 30% QoQ

increase in gross NPL creation is the worst item, even if we expect a portion of this to

derive from the anticipation of the AQR. Nevertheless, cash coverage rose to 46% up

1.5 p.p. QoQ.

ISP booked a heavy cleanup in Q413...

ISP chose to clean-up its balance sheet in Q413 by writing down €5.8bn of goodwill and incurring

€3.1bn of provisions, more than offsetting €1.7bn of operating income and c.€2.4bn from the gain

on valuation of Banca d’Italia stake and totaling a €5.2bn loss for Q4 and €4.6bn loss for the full

year 2013. In , we show the quarterly P&L for Q413 and Q313 and highlight the difference in Q4

under the operating income line.

Table 3 – Q413 P&L results

Q413 Q313 QoQ

NII 2,038 2,031 0%

Dividends + equity consolidation -2 -6 -67%

Fees 1,625 1,483 10%

Trading 70 401 -83%

Insurance business 143 204 -30%

Other income 70 33 n.a.

Total Revenues 3,944 4,146 -5%

Total Costs -2,202 -2,041 8%

Staff costs -1,201 -1,204 0%

G&A -811 -666 22%

Depreciation -190 -171 11%

Operating income 1,742 2,105 -17%

LLP -3,100 -1,467 n.a.

Risk and charges provisions -249 -1 n.a.

Net impairment losses on other assets -170 -32 n.a.

Profits (Losses) on investments held to maturity and on other investments 2,441 -35 n.a.

PBT 664 570 16%

Taxes 27 -264 n.a.

Integration costs -42 -5 n.a.

PPA -75 -72 4%

Goodwill adjustments -5,797 0 n.a.

Discontinued operations 0 0 n.a.

Minorities 33 -11 n.a.

Net profit -5,190 218 n.a.

Source: Mediobanca Securities, Company data

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Intesa Sanpaolo

08 April 2014 ◆ 7


...wrote-off 55% of goodwill...

ISP wrote down intangibles by €6.8bn in Q413 which was 33% of ISP’s total in the previous quarter.

46% of the cleanup reduced the goodwill in Banca dei Territori by 40%, 23% of the cleanup wiped all

the goodwill in CIB and international businesses and 7% wiped out the brand name intangible of CIB.

The remaining €5.8bn of goodwill is concentrated in Banca dei Territori (32%), Eurizon (18%),

Fideuram (17%) and the brands of Banca dei Territori and Fideuram (33%).

...and incurred the highest LLPs it has ever done...

The €3.1bn of provisions that ISP booked in Q413 made the total provisions booked for the full year

2013 €7.1bn, the highest ever recorded by ISP. The 207bps of provisions booked for 2013, was 65%

higher than the 125bps booked in 2012. In total since 2008, ISP has booked €26bn provisions, 2.0% of

Italy’s GDP and 7% of the 2008-2013 average loan book.

Chart 2 – Q413 Intangible impairment breakdown

12.5

5.8

Goodwill - BdT

3.1

0.80.7

0.51.6

Goodwill - Eurizon

Goodwill - Fideuram

Brand names

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Intangibles Q314

BdT Goodwill

CIB Goodwill

Int'l Goodwill

CIB brand impairment

Other impairment

Intangibles Q414


Chart 3 – Loan loss provisions (LLPs)/ Loans, 2004-2013

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


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Intesa Sanpaolo

08 April 2014 ◆ 8


...from a high inflow of impaired loans...

The large amount of provisions that were booked in 2013 match the high flow of impaired loans. In

the chart below, we have the flow of impaired loans over the last 5 quarters. We notice that while

there was a decrease in the flow of impaired loans from Q412 to Q113, flows have been increasing

throughout 2013. In Q413, the inflow of impaired loans increased by 30% QoQ coming from an 2.5x

increase of loans classified as substandard more than offsetting the 40% drop in flows of loans that

are past due.

.. and 1.5 p.p. quarter-on-quarter increase in cash coverage to 46%

The €3.1bn charge of provision in the quarter increased cash coverage on impaired loans from 44.5%

to 46%, not weakening its footing before the AQR test later this year. In the top part of Table 4, we

can see how the coverage ratio increased c.2 percentage points from Q313 to Q413 across different

type of impaired credit (Doubtful, restructured, past due) and kept the coverage of performing

loans flat. In the second part of Table 4, we layout the coverage by credit type for impaired loans.

We highlight, the coverage on:

Chart 4 – Gross inflow of new impaired loans, Q412-Q413

4.2

3.5 3.6 3.7

4.8

0

1

2

3

4

5

6

4Q12 1Q13 2Q13 3Q13 4Q13

Substandard

Past due

Restructured

Doubtful


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Intesa Sanpaolo

08 April 2014 ◆ 9


Households: have the lowest cash coverage of any credit type (37%) but the highest

overall coverage including collateral (205%);

Small businesses and SMEs: have the highest cash coverage of any credit type (53%) but

the lowest overall coverage including collateral (116%) due to having low collateral

coverage;

R.E. & Construction: have 42% cash coverage and 112% collateral coverage for a total

154% coverage;

Leasing, factoring and CIB: have 46% cash coverage and 80% collateral coverage for a

total 126% coverage.

TBV increased by 6% largely from Bank of Italy stake revaluation

The €5.2bn loss booked in Q413 decreased the book value (BV) of ISP by 10% but this came largely

from writing down intangible assets. Excluding these, tangible book value actually increased 6% in

the quarter, largely due to the €2.2bn revaluation of the Bank of Italy stake. In the chart below, we

layout the evolution of tangible equity from Q314 to Q414 and find that goodwill dropped 55% and

other intangibles 37%.

Table 4 - Coverage ratio Q413 vs Q313

Q313 Q413

Doubtful 61.0% 62.5%

Substandard 23.5% 23.2%

Restructured 13.0% 15.1%

Past due 10.6% 12.3%

Total impaired 44.5% 46.0%

Performing 0.8% 0.8%

Impaired - Q413 Cash coverage W/ Collateral

Households 37% 205%

Small business and SMEs 53% 116%

R.E. & Construction 42% 154%

Leasing, factoring, CIB 46% 126%


Chart 5 – Breakdown of Book Value, Q413 vs Q313

20

25

30

35

40

45

50

55

Q314 Q414

TBV Goodwill Other Intangibles


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Intesa Sanpaolo

08 April 2014 ◆ 10


MBe 8% below 2017E targets from lower fees ISP targets to restore profitability during the Business Plan with 11.8% RoTE target in

2017E, on account of 6 p.p. lower C/I ratio, LLP normalisation to 77bp and 3.3% loan

CAGR. We estimate the Plan assumptions are conservative on rates evolution and

LLPs, less so on the underlying volume growth and NII evolution, once adjusting for

the decay of the non-core portfolio and of the carry trade and deposit hedging

contributions. Therefore, we position at 8% discount on account of lower operating

profitability essentially from better-than-plan costs and NII offset by lower fee income

evolution. We find an optimistic/pessimistic approaches to the Plan assumptions

explain c. 2 p.p. higher/lower 2017E RoTE target.

ISP targets balance sheet and AM growth to drive revenues

In Table 5 we layout the ISP targets for 2017 and compare it to 2013 actual numbers. We note that

ISP is targeting multiplying its profitability by 10x from 2013 numbers from provisions dropping to

77bps (from 207bps) while operating income increases 31%. The increase in operating income comes

from revenues increasing 4.2% CAGR until 2017, while costs grew at a lower 1.3%. The growth in

revenues comes from the 3.3% CAGR growth in customer loans and fees while ISP’s efficiency

measures keeps cost growth low. ISP is targeting reaching 12% RoTE by 2017 if keeping its fully

phased-in Basel 3 core capital at 12.2% or 15% RoTE if it is allowed to decrease its core capital to

9.5%.

MBe is 8% below 2017 targets on more prudent fee income evolution

In Table 6 we layout the ISP targets for 2017 and compare it to MBe and consensus. We note that

MBe is 8% below ISP targets in 2017 but in-line with Bloomberg consensus. The difference with ISP

comes from ISP targeting operating margin 2.4% higher than MBe which stems from15% higher fees

due to an aggressive target of 7.4% CAGR. MBe for C/I and cost of risk are the same as ISP’s target

and NII is 9% above. MBe is in-line with Bloomberg consensus on 2017e net profit but 5% lower PBT.

Overall, 2017e RoTE MBe is 10.3% while ISP is targeting 11.8%. There is no Bloomberg consensus for

2017e so we compare against the 2016 estimate which is 9.6%.

Table 5 – ISP 2017 targets

2013 2017 CAGR

Adj Net income 0.4 4.5 83.1%

Customer loans (€bn) 344 392 3.3%

RWAs (€bn) 276 296 1.7%

Total Revenues 16.3 19.2 4.2%

Operating Costs 8.4 8.8 1.3%

Operating Income 7.9 10.4 7.0%

PBT 2.5 7.0 29.5%

Provisions 207bp 77bp

RoTE n.a. 11.80%

Cost/Income 51% 46%

Dividend 0.8 4.0 48.5%

Source: Mediobanca Securities, Company presentation

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08 April 2014 ◆ 11


Table 6 - ISP targets vs MBe and Bloomberg consensus

ISP target Consensus MBe ISP vs MBe Consensus vs MBe

Net income 4.5 4.2 4.1 -8.1% -0.6%

Customer loans (€bn) 392 389 -0.8%

RWAs (€bn) 296 309 4.4%

Total Revenues 19.2 18.9 18.7 -2.8% -1.5%

Operating Costs 8.8 8.6 -2.4%

Operating Income 10.4 10.1 -3.2%

PBT 7.0 7.1 6.8 -3.1% -4.9%

Provisions 77bp 78bp

RoTE 11.8% 9.6%* 10.3%

Cost/Income 46% 46%

Dividend 4.0 3.2 4.0

2017e

Source: Mediobanca Securities Company presentation, Bloomberg

*2016 Bloomberg consensus, 2017 is not available

Conservative Business Plan assumptions on rates and LLP, more aggressive on volumes and NII

Table 7 shows the ISP Business Plan targets and their underlying CAGR assumptions to understand

the extent of conservativeness embedded. ISP is targeting: 3.3% loan CAGR 2013-17, 2.6% NII CAGR

2013-17, minimal base rate increases and 80bp LLP in 2017.

We focus our inspection on the implication for the factors driving NII. Adjusting customer loans

growth for the non-core portfolio downsizing (from €41bn to €22bn, i.e. taking all NPLs - €27bn,

€5bn non strategic Hungarian loans and €9bn foreign financing through the former BIIS unit of the

group and following the downsizing indication of the Plan), the 3.3% 2013-17 CAGR raises to 5.1%;

arguably a less conservative growth rate considering the c.1% annual GDP assumption embedded in

the Plan.

Looking at margins, 2.6% NII CAGR looks conservative at a first glance. This embeds no base rate

hikes and a 25bp uptick in interbank rates to 40bps, a conservative assumption given the forward

curve on rates, in our view. Nevertheless, when adjusting NII for the attrition in the contribution

from carry trade (keeping €67bn bond exposure flat but reducing yield to current level) and hedging

on deposits (from €1.0bn in 2013 to €0.7bn in 2017E), we retrieve an underlying 7% 2013-17E CAGR;

a less conservative assumption, in our view. Comparing the latter with the adjusted loan CAGR

implies underlying margin expansion, which matches company guidance on further asset repricing

and funding cost savings. This leads to an adj. NIM evolution from 1.7% in 2013 to 1.97% in 2017E.

Overall, we would therefore summarise the Business Plan assumptions as a mix of conservative ones

(rates, provisions) and more optimistic underlying ones (core volume and core NII).

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08 April 2014 ◆ 12


Table 7 – ISP Business Plan targets and implied 2013-17E CAGR

BP assumptions 2013 2014E 2015E 2016E 2017E 13-17E CAGR

NII 8,132 9,000 2.6%

...IT govies in the bank bond book 67,184 67,184

...avg. yield at 2yr duration 1.79% 0.84%

...P&L contribution from carry trade 1,201 564 564 -17.2%

...deposit hedging contribution 1,044 700 -9.5%

Core NII ex-carry trade and hedging phasing 5,887 7,736 7.1%

NIM 2.36% 2.30%

NIM ex-carry trade and hedging phasing 1.71% 1.97%

Base ECB rate 0.25% 0.25% 0.25%

Euribor 0.16% 0.40%

LLP 7,131 3,000

...bp 2.1% 0.8%

Loans 343,991 392,000 3.3%

...core 302,991 370,000 5.1%

...non-core loans 41,000 22,000 -14.4%


P&L sensitivity shows 2 p.p. RoTE volatility in pessimistic/optimistic scenarios

We test the sensitivity of ISP’s target to further improvement in the environment. We simulate the

following scenarios to ISP’s targets to find potential profit sensitivity:

Optimistic Scenario:

1. 100bp increase in yields which increases NII by €0.6bn vs target

2. LLPs of 65bps on the core bank vs 80bps targeted

Pessimistic Scenario:

1. Fees grow at 4.5% CAGR vs 7.4% CAGR targeted

2. Core loan growth of 3% CAGR vs 5.1% targeted

We find that under our optimistic scenario net income would be 17% above ISP’s target and under

our pessimistic scenario it would be 14% below. Given the 12.2% fully phased-in Basel 3 in 2017, we

estimate that RoTE would be 13.9% in our optimistic scenario and 10.2% in our pessimistic scenario.

Table 8 – ISP 2017 target vs optimistic and pessimistic scenarios

Target Less conservative More conservative

NII 9.0 9.6 8.8

Fees & Commmissions 8.2 8.2 7.3

Other 2.0 2.0 2.0

Total Revenues 19.2 19.8 18.2

Total Costs -8.8 -8.8 -8.8

Operating Income 10.4 11.0 9.4

LLPs -3.0 -2.4 -2.9

Other expenses -0.4 -0.4 -0.4

PBT 7.0 8.2 6.0

Taxes -2.5 -2.9 -2.1

Net income 4.5 5.3 3.9

LLPs -0.81% -0.65% -0.81%

Core loans 369 369 362

NIM 2.4% 2.6% 2.4%

EPS 0.27 0.32 0.24

RoTE 11.8% 13.8% 10.1%

Source: Mediobanca Securities, Company presentation

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Intesa Sanpaolo

08 April 2014 ◆ 13


€10bn cumulative cash back means 5% avg. yield We estimate an average 5% yield during the Plan from the dividend commitment of

ISP. This implies a staggering 76% cumulative payout ratio, touching 97% in 2017E.

This, while maintaining 12% CET1 ratio.

€10bn cash back implies 5% average 2014-17E yield…

Table 9 shows the calculation of the dividend yield of the stream of dividends embedded in the ISP

Business Plan. We estimate a 5% average annual yield over the next four years, one of the highest of

the sector and an appealing factor, in our view.

Table 9 – ISP dividend payout evolution

Yield 2014E 2015E 2016E 2017E

ISP market cap 41,760

Dividend stream 1,000 2,000 3,000 4,000

NPV of dividends 1,000 1,819 2,483 3,011

Yield 2.4% 4.4% 5.9% 7.2%

Average annual yield 5.0%


…implies 76% cumulative dividend payout; 97% payout in 2017E…

Table 10 shows the ISP profits and dividends evolution 2014-17E (see Table 10). We estimate ISP’s

dividend payout would grow from 46% in 2014E to 97% 2017E, according to the €1bn 2014E dividend

promise, growing by €1bn every year for the following four years. Consequently, we estimate a

dividend cover falling from 2.2x to 1x over the period.

Table 10 – ISP dividend payout evolution

Payout 2013 2014E 2015E 2016E 2017E 14-17E

Profits -4,550 2,171 3,083 3,695 4,137

Dividend committment 822 1,000 2,000 3,000 4,000

Dividend payout ratio 46.1% 64.9% 81.2% 96.7% 76.4%

Dividend cover 2.2x 1.5x 1.2x 1.x


…while maintaining 12% CET1 Basel III fully loaded

Table 11 shows our estimate of the Basel III fully loaded CET1 ratio evolution at ISP from 2013 to

2017E, according to the following assumptions/adjustments:

€10bn cumulative dividends 2014-17E as per Business Plan targets;

€14.9bn additional RWAs from Basel III fully loaded approach;

€4bn CET1 boost vs reported Core Tier 1 capital from €1.7bn release from the treatment of

insurance participations, €2.8bn boost from the Bank of Italy stake revalution and the Danish

compromise and €400m deductions from DTAs on tax loss carry forward.

These lead to 12.1% Basel III fully loaded ratio in 2013, which we see largely flat in following years

(11.9% in 2017E) as dividend largely absorb capital generation in a low single digit (2.7%) CAGR of

RWAs.

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08 April 2014 ◆ 14



Capital 2013 2014E 2015E 2016E 2017E

Net profit -4,550 2,171 3,083 3,695 4,137

Dividends 822 1,000 2,000 3,000 4,000

RWAs 276,300 280,052 289,211 298,975 309,076

...adjustments 14,900 14,900 14,900 14,900 14,900

RWAs Basel III FL 291,200 294,952 304,111 313,875 323,976

Core Tier 1 31,295 32,466 33,548 34,243 34,380

...adjustments 4,021 4,021 4,021 4,021 4,021

CET1 Basel III FL 35,316 36,486 37,569 38,264 38,401

CET1 ratio 12.1% 12.4% 12.4% 12.2% 11.9%

CET1 ratio >10% 7,652 8,466 8,678 8,445 7,623


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08 April 2014 ◆ 15


Generous cash back policy vs potential regulatory risk Our calculations above show stability in ISP’s regulatory ratios despite a strong

dividend payout commitment. This should potentially provide comfort on the

feasibility on the targeted €10bn dividends. Nevertheless, a payout close to 100%

could potentially attract the attention of regulators, still focused on propping up

banks’ capital resources as opposed to seeing these paid out to shareholders. This has

been the case for Swiss or US banks which got to the cash back investment case ahead

of European players. In this section we evaluate the relative positioning of ISP in

Europe on the payout-capital-profitability 3D map to assess the potential regulatory

risk hanging over the strong dividend payout commitment. ISP is the highest payout

target despite CET1 in line with cash cow peers and below average ROTE. We see

some potential risk to the 2017E payout and to the potential payout of reserves

through extra dividends.

An outlier on 2014-17E cumulative payout despite peer-like regulatory ratios...

Chart 6 shows the map of the average 2014-17 cash dividend payout ratio vs the 2015E CET1 Basel 3

fully loaded for Europe’s cash cow banks. We find the panel sits on 12% CET1 ratio and 48% payout,

with SWEDA at one extreme (18%, 75%) and SAN on the other (9%, 64%). ISP emerges as a clear

outlier with 12% CET1 ratio and 76% payout, implying peer average regulatory ratios and 1.5x higher

cash dividend payout. This make ISP the higher payout ratio in the panel, slightly above SWEDA

despite a CET1 ratio 1/3 lower.

...but ROTE stands 2 p.p. behind peers...

Chart 7 shows the map of the average 2014-17 cash dividend payout ratio vs the 2016E RoTE (2017E

at ISP and UCG to capture the restructuring of their BPs) for Europe’s cash cow banks. We find the

panel sits on 12% RoTE ratio and 48% payout, with SWEDA again outlier on one extreme (18%, 75%)

and French and Italian banks on the opposite side. ISP again emerges as a clear outlier with 10%

RoTE and 76% payout, implying RoTE 2 p.p. below peers and 1.5x higher cash dividend payout. This

make ISP the higher payout ratio in the panel, slightly above SWEDA despite a 42% lower RoTE.

Chart 6 – avg 2014-17 payout vs CET1 Basel 3 fully loaded 2015E

ING

CA

KN

ISP

UCG

CABK

NDA

BNPSG

BARLLOY

BBVA

SAN

HSBC

SWEDA

SEB

SHB

PEERS

10%

20%

30%

40%

50%

60%

70%

80%

7% 9% 11% 13% 15% 17% 19%

avg

2014-1

7 p

ayout

CET1 Basel 3 fully loaded 2015


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Intesa Sanpaolo

08 April 2014 ◆ 16


Chart 7 – avg 2014-17 payout vs 2016E RoTE

ING

CA

KN

ISP*

UCG*

CABK NDA

BNP

SG

BARLLOY

BBVA

SAN

HSBC

SWEDA

SEB

SHB

PEERS

10%

20%

30%

40%

50%

60%

70%

80%

10% 11% 12% 13% 14% 15% 16% 17% 18% 19%

avg

2014-1

7 p

ayout

2016E RoTE

Source: Mediobanca Securities, company data * ROTE 2017E

...also because of one of the lowest leverage ratios in Europe...

Our peer group analysis confirms ISP is targeting the highest payout ratio of all major European cash

cow banks, with in-line CET1 ratio but below average ROTE. Partly, this is due to the worse state of

the underlying economy (lower volumes, higher LLPs), partly it is on account of lower than average

leverage. Chart 8 shows the map of TE/TA vs ROTE for the major European cash cow banks. With

over 6%, ISP is one of the banks with the lowest leverage, only matched by CABK and BBVA and 1.5

p.p. above the peer average. For ISP, realigning this item would imply an excess of €9.6bn capital,

which would imply 3.3% reduction in CET1 ratio to c. 8.9%.

Chart 8 – 2015 TE/TA vs RoTE 2016

ING

CA

KN

ISP*

UCG*

CABK

NDABNP

SG

BARLLOY

BBVA

SAN

HSBC

SWEDA

SEB

SHBPEERS

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

10% 11% 12% 13% 14% 15% 16% 17% 18%

2015E T

E/T

A

2016E RoTE

Source: Mediobanca Securities, company data * ROTE 2017E

ING

CA

KN

ISP*

UCG*

CABK NDA

BNP

SG

BARLLOY

BBVA

SAN

HSBC

SWEDA

SEB

SHB

PEERS

10%

20%

30%

40%

50%

60%

70%

80%

10% 11% 12% 13% 14% 15% 16% 17% 18% 19%

avg

2014-1

7 p

ayout

2016E RoTE

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08 April 2014 ◆ 17


...yet, regulatory risk cannot be ruled out, in our view...

The analysis above refers back to the theme of harmonisation of rules within the upcoming Banking

Union and more specifically to the potential harmonisation of risk-weights in the calculation of

RWAs which is so heterogeneous across banks today vs the argument of IRBA models as the best way

to assess risks. Which of the two will prevail will have meaningful implications for the crystallisation

of relative value across European banks, and particularly for ISP as one of the best placed names.

Current market prices are telling us investors remain in a sceptical ‘wait and see’ mood on the

topic as so much uncertainty lingers on regulation in Europe. Precisely because of the latter, we see

potential regulatory risk in the dividend payout embedded in ISP’s Business Plan. We have seen this

before in US and Swiss banks’ intentions of returning to high DPS payout and buyback programs but

put off by national regulators looking to retain resources within the banks to support the economy

and raise defences further. It is hard for us to predict where regulators will go next as capital

requirements have continuously been increased in the last years, globally.

...at least on the extra dividend front

Because of the point above, we see extra dividends paying out reserves to shareholders as difficult

in the current environment. The Business Plan indicates that, despite the strong dividend payout,

ISP would retain excess capital in the €8bn region, derived from a benchmark 9.5% CET1 ratio level

set as minimum for G-SIFI banks, even if ISP is not a G-SIFI bank. We are cautious on banks being

allowed to pay out reserves in this environment, but we recognise things could change going

forwards, particularly with a stabilisation of the macro economy. On this specific issue, we recall

the European Banking Authority (EBA) providing indications to banks that the potential re-rating of

capital ratios could not happen merely though RWA contraction. They indicated the numerator of

capital ratios should maintain at least the absolute level indicated in the last stress tests of June

2012. For ISP, this was €33.8bn, €1.5bn south of the 2013 level and €6bn lower than the €8bn

indication of the Business Plan (see Table 11). We understand this is not an official or mandatory

restriction, but an indication. Furthermore, it would be logical for such restriction to apply only to

banks non-compliant with Basel III fully loaded ratios, which is certainly not ISP’s case.

Nevertheless, this further potential constraint at least confirms caution is not unfounded before a

potential extra dividend policy in the short term, in our view.


Capital 2013 2014E 2015E 2016E 2017E

RWAs Basel III FL 291,200 294,952 304,111 313,875 323,976

CET1 Basel III FL 35,316 36,486 37,569 38,264 38,401

CET1 ratio 12.1% 12.4% 12.4% 12.2% 11.9%

CET1 ratio >10% 7,652 8,466 8,678 8,445 7,623

EBA reference CT1 33,762 33,762 33,762 33,762 33,762

Capital > EBA guideline 1,554 2,724 3,807 4,502 4,639


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08 April 2014 ◆ 18


ISP vs UCG: ‘the beautiful game’ As the Brazilian World Cup approaches, we see ISP’s and UCG’s Business Plans as their

tough training to make it to Sao Paolo. In this chapter, we simulate these world class

teams in an ‘no-holds barred’ match. We see ISP starting from a fitter condition made

of strong cash back commitment providing a defence shield protecting against

downside on share price. The slower start of UCG derives from the fatigue from the

Q413 heavy cleanup workout which reduced capital and pay out room. Nevertheless,

this training should pay off later in the match as UCG should count on better

endurance from the higher visibility on NPL coverage (52% vs 46%) and non-core to

core capital redeployment, which is largely overlooked by the bookies, in our view.

This should provide UCG with a chance to come back through higher growth rates,

granting for a breath-taking match. Only ISP’s reliance on its (P&L) champions (higher

operating leverage and rate sensitivity) equalise this compelling game.

ISP vs UCG: a tough match, ending in a draw

ISP and UCG both presented new Business Plans targeting similar ROTE re-rating (11.8% at ISP in

2017E, 13% at UCG in 2018), but the means to get them there are very different. Table 13 compares

the evolution of the main profitability, regulatory and valuation metrics of ISP and UCG over the

2013-17E period. With our minds already synched with the upcoming Brazilian World Cup, we have

imagined the comparison between the strengths of the two banks as a match between world class

football teams. The result is a tough draw all the way to extra time, implying investors could have

room for both in shaping up their fantasy football portfolios. Sit down, relax and enjoy the match:

Regulation time

Capital strength – ISP starts 1.5 p.p. above UCG on CET1 fully loaded ratio, following the

recent Bank of Italy stake revaluation, which added c. 0.5 p.p. additional spread.

Progressively, the gap is meant to close into 2017E, but ISP starts a step ahead.

ISP 1 – 0 UCG

Cash back – the higher capital ratios allow ISP to target the highest payout among

European cash cows. Hence ISP attracts income-focused investors, while UCG will need to

retain a larger part of earnings to boost the capital position north of 10%. This implies

targeting 40% payout at UCG vs 76% at ISP. Our calculations suggest were UCG targeting

10% CET1, 60% payout could be at hand, but by the same token, this should allow ISP to

target a payout >100%. In summary, ISP offers c. 2x the expected yield of UCG. ISP 2 – 0

UCG

NPL coverage – UCG took the coverage issue by the horns in Q413, charging €9.5bn LLPs

and raising cash coverage by 6 p.p. to 52%. Despite stronger capital ratios, ISP settled at

46%, even if collateral coverage is similar (82% at ISP, 75% at UCG). We calculate a UCG-

style cleanup at ISP could cost €2bn or 70bp of CET1 ratio, given the low shortfall to

expected loss deduction currently in ISP’s ratios. ISP 2 – 1 UCG

Injury time

Non-core into core – ISP and UCG both have segregated large portfolios of non-core assets

which have to be progressively downsized to free up resources for the core businesses and

whose redeployment should contribute to ROTE boost. Both have left upside from this out

of BP targets. Both banks target to halve exposure over the BP, but UCG runs with 2x the

burden, at 2.1x TE vs ISP at 1.2x. We calculate this theme could bring material upside and

by default UCG has higher exposure. ISP 2 – 2 UCG

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08 April 2014 ◆ 19


Extra time, no golden goal, no penalty kicks

Growth – we see UCG offering 33% 2014-17E EPS CAGR, above ISP’s 24% equivalent figure,

largely from the stronger restructuring potential in W-Europe and the higher growth profile

from CEE. ISP 2 – 3 UCG

ROTE – we expect ISP and UCG to walk hand in hand in their respective ROTE re-rating

paths. Both running at 5% in 2014E and heading for 10-11% in 2017E. ISP 2 – 3 UCG

Valuation – we compare ISP and UCG on perspective P/E, P/OP and P/TE. We find UCG stands at a constant 25% discount to ISP on these valuation metrics. ISP 2 – 4 UCG

Rates – ISP can count on a higher rate sensitivity than UCG given the higher incidence of non-remunerated deposits as a portion of total funding. ISP 3 – 4 UCG

Operating leverage – 46% C/I ratio at ISP vs 55% at UCG. This grants for higher operating leverage at ISP. ISP 4 – 4 UCG

The match ends in a draw where ISP’s initial strength is overtaken by UCG’s strong come back as a

result of the stamina injected by the recent cleanup and by the vigour of the CEE franchise. Only

P&L-driven and macro-growth-skewed characteristics allow ISP to equalise the match.

Table 13 – ISP vs UCG

ISP vs UCG 2013 2014E 2015E 2016E 2017E

NPL coverage

ISP Coverage (cash) 45.4%

UCG Coverage (cash) 51.6%

ISP Coverage (collateral) 82.0%

UCG Coverage (collateral) 75.4%

UCG-style c leanup at ISP

Additional provisions 3,496

Expected loss shortfall -400

Aftertax impact 2,447

CET1 impact 2,047

CET1 ratio Basel 3 fully loaded post c leanup

CET1 fully loaded after cleanup 11.4% 11.7% 11.7% 11.5% 11.1%

...excl. BOI stake revaluation 10.6% 10.6% 10.6% 10.6% 10.6%

CET1 fully loaded UCG 9.6% 10.8% 11.0% 11.1% 11.5%

...excl. BOI stake revaluation 9.3% 9.5% 9.9% 9.9% 10.4%

ROTE evolution

ISP ROTE -12.3% 5.7% 7.8% 9.2% 10.3%

UCG ROTE -11.3% 5.6% 7.2% 8.6% 10.8%

Dividend yield evolution

ISP - Expected dividend yield 2.0% 2.4% 4.8% 7.2% 9.6%

UCG - Expected dividend yield (@40% avg. payout) 1.5% 1.2% 2.8% 4.0% 5.3%

Non-core inc idence to TE

Non-core / TE 123.3% 56.9%

Non-core / TE UCG 209.9% 169.4% 139.3% 119.9% 89.5%

Valuation multiples

ISP - P/Operating profit 5.3x 5.1x 4.7x 4.4x 4.1x

UCG - P/Operating profit 4.3x 4.x 3.7x 3.4x 3.x

ISP - EPS growth 41.9% 19.1% 11.6%

UCG - EPS growth UCG 32.9% 24.4% 31.5%

ISP - P/E adj. 701.6x 18.3x 12.9x 10.8x 9.7x

UCG - P/E adj. UCG -7.9x 16.4x 12.3x 9.9x 7.5x

ISP - P/TE 1.1x 1.1x 1.1x 1.x 1.x

UCG - P/TE .9x .9x .9x .8x .8x


Capital 2013 2014E 2015E 2016E 2017E

Net profit -4,550 2,171 3,083 3,695 4,137

Dividends 822 1,000 2,000 3,000 4,000

RWAs 276,300 280,052 289,211 298,975 309,076

...adjustments 14,900 14,900 14,900 14,900 14,900

RWAs Basel III FL 291,200 294,952 304,111 313,875 323,976

Core Tier 1 31,295 32,466 33,548 34,243 34,380

...adjustments 4,021 4,021 4,021 4,021 4,021

CET1 Basel III FL 35,316 36,486 37,569 38,264 38,401

CET1 ratio 12.1% 12.4% 12.4% 12.2% 11.9%

TE 37,315 38,486 39,568 40,263 40,400

EBA reference CT1 33,762 33,762 33,762 33,762 33,762

CET1 ratio >10% 7,652 8,466 8,678 8,445 7,623

Capital > EBA guideline 1,554 2,724 3,807 4,502 4,639

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Affordable shopping list The excess capital ISP will carry forward alongside the dividend payout commitment is

the war chest to seize growth opportunities. We reverse engineer what this could

mean for potential targets given the maximum balance stretch ISP would likely allow

itself. The result is that targets could amount to €95bn RWA, allowing ISP to look at a

very wide range of banks with heterogeneous investment cases able to transform ISP.

ISP’s excess capital will primarily be devoted to growth...

The ISP’s Business Plan identified a large amount of excess capital (€8bn at 9.5% Basel III fully

loaded). This will be devoted to fund growth opportunities. If these will not be sufficient, the bank

could evaluate returning it to shareholders.

...so that ISP could acquire €95bn of RWAs with its excess capital...

We analyse the affordability of an acquisition using ISP’s excess capital. In the table below, we use

our estimated net profit until 2017 and a 50% payout ratio (below ISP’s target but in line with the

level of European peers) to estimate future retained earnings and hence core capital ratio. We find

that using these assumptions, ISP could have by 2017e €9.5bn capital over 10% CET1 Basel 3 (above

the 9.5% GSIFI requirements) implying it could acquire c.€95bn of RWAs.

Table 14 – affordable ISP RWAs stretch in M&A

2013 2014E 2015E 2016E 2017E

Net profit -4,550 2,171 3,083 3,695 4,137

Dividend @ 50% payout 1,085 1,541 1,847 2,069

Retained profits 1,085 1,541 1,847 2,069

CET1 ratio Basel 3 fully loaded 35,316 36,401 37,942 39,790 41,858

RWAs Basel 3 fully loaded 291,200 294,952 304,111 313,875 323,976

CET1 ratio Basel 3 fully loaded 12.1% 12.3% 12.5% 12.7% 12.9%

Excess capital @ 10% 6,196 6,906 7,531 8,402 9,461

Implied RWA support 61,958 69,059 75,313 84,022 94,607


...opening many potential acquisition options

The €95b of RWAs that ISP could afford to acquire could come through the acquisition of a bank in

Europe. In the table below, we have listed banks in Europe that fall within this size limit and which

offer ISP different investment cases:

Emerging market: earnings growth potential and geographic diversification;

Cash cows: geographic diversification with steady cash flows and less risk albeit at a

higher price;

Domestic Italian: cost cutting opportunity and potential to consolidate further the Italian

market. ISP has stated that it is not interested in following this route;

CIB/AM: business line diversification and gearing on asset management and global

corporate services.

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Table 15 – affordable ISP RWAs stretch in M&A

EM Cash cows Domestic Italy CIB/AM

Erste Bank KBC PMI Natixis

Reiffeisen Banco Popular BP

Alpha Bank Bankinter Carige

NBG Sabadell Credem

Piraeus Bankia Creval

Eurobank Swedbank UBI Banca

PKO SEB MPS


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Divisional estimates

Table 16 – Banca dei Territori

Banca dei Territori 2013 2014E 2015E 2016E 2017E

NII 6,221 6,388 6,624 6,868 7,121

Dividends + equity consolidation 12 12 12 12 12

Fees 4,095 4,197 4,302 4,431 4,564

Trading 66 71 76 76 76

Insurance business 707 728 750 750 750

Other income 34 34 34 34 35

Total Revenues 11,135 11,430 11,798 12,171 12,557

Total Costs -5,282 -5,233 -5,263 -5,290 -5,395

Staff costs -2,983 -3,048 -3,139 -3,233 -3,330

G&A -2,291 -2,177 -2,115 -2,048 -2,055

Depreciation -8 -8 -8 -9 -9

Operating income 5,853 6,197 6,535 6,881 7,163

LLP -5,561 -2,752 -2,170 -2,012 -1,957

Risk and charges provisions -47 -69 -68 -61 -62

Net impairment losses on other assets -1 0 0 0 0

Profits (Losses) on investments held to maturity and on other investments 0 0 0 0 0

PBT 244 3,376 4,297 4,808 5,144

Taxes -52 -1,283 -1,590 -1,731 -1,852

Integration costs -67 -13 -13 -13 -13

PPA -167 -109 -92 -92 -92

Goodwill adjustments -3,912 0 0 0 0

Discontinued operations 0 0 0 0 0

Minorities 0 0 0 0 0

Net profit -3,954 1,971 2,601 2,972 3,186


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Table 17 – Corporate and Investment Banking

Corporate and Investment Banking 2013 2014E 2015E 2016E 2017E

NII 1,864 1,939 1,996 2,056 2,117


Fees 815 831 856 882 900

Trading 675 540 556 556 556



Total Revenues 3,361 3,329 3,428 3,513 3,592

Total Costs -808 -797 -821 -845 -871

Staff costs -294 -300 -309 -318 -328

G&A -510 -493 -508 -523 -539

Depreciation -4 -4 -4 -4 -5


LLP -719 -556 -482 -501 -522


Net impairment losses on other assets -92 -60 -54 -54 -55

Profits (Losses) on investments held to maturity and on other investments -15 0 0 0 0

PBT 1,716 1,897 2,052 2,093 2,125

Taxes -650 -664 -718 -732 -744


PPA 0 0 0 0 0

Goodwill adjustments -1,134 0 0 0 0



Net profit -71 1,230 1,331 1,357 1,378


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Table 18 – Fideuram

Fideuram 2013 2014E 2015E 2016E 2017E

NII 147 154 162 170 179


Fees 661 681 708 729 751

Trading 17 9 9 9 9


Other income -8 -8 -8 -8 -8

Total Revenues 895 917 955 985 1,015

Total Costs -322 -328 -335 -341 -348

Staff costs -126 -128 -131 -134 -136

G&A -180 -184 -187 -191 -195

Depreciation -16 -16 -17 -17 -17

Operating income 573 589 621 643 667

LLP -6 0 0 0 0



Profits (Losses) on investments held to maturity and on other investments -2 -2 -2 -2 -2

PBT 486 520 550 571 593

Taxes -150 -156 -165 -171 -178


PPA -89 -85 -80 -80 -80

Goodwill adjustments -29 0 0 0 0



Net profit 217 279 304 318 334


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Table 19 – Eurizon Capital

Eurizon Capital 2013 2014E 2015E 2016E 2017E

NII 0 0 0 0 0


Fees 371 388 407 427 449

Trading 3 0 0 0 0



Total Revenues 389 400 419 440 461

Total Costs -111 -113 -115 -117 -120

Staff costs -51 -52 -53 -54 -55

G&A -60 -61 -62 -63 -65

Depreciation 0 0 0 0 0

Operating income 278 287 305 323 342

LLP 0 0 0 -3 -3

Risk and charges provisions 14 0 0 0 0

Net impairment losses on other assets 0 0 0 0 0

Profits (Losses) on investments held to maturity and on other investments 0 0 0 0 0

PBT 292 287 305 320 339

Taxes -87 -63 -67 -70 -74

Integration costs 0 0 0 0 0

PPA -39 -38 -38 -38 -38

Goodwill adjustments 0 0 0 0 0


Minorities -6 -6 -6 -6 -6

Net profit 160 180 193 205 220


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Table 20 – International Subsidiaries

International Subsidiaries 2013 2014E 2015E 2016E 2017E

NII 1,556 1,617 1,666 1,716 1,767


Fees 550 549 560 577 594

Trading 110 109 117 117 117


Other income -82 -82 -82 -83 -84

Total Revenues 2,167 2,227 2,294 2,360 2,428

Total Costs -1,155 -1,126 -1,132 -1,137 -1,142

Staff costs -584 -574 -580 -586 -592

G&A -451 -431 -428 -425 -423

Depreciation -120 -121 -123 -125 -127


LLP -796 -674 -584 -511 -498



Profits (Losses) on investments held to maturity and on other investments -10 -10 2 2 2

PBT 22 334 557 691 767

Taxes -177 -109 -183 -235 -265

Integration costs 0 0 0 0 0

PPA 0 0 0 0 0

Goodwill adjustments -722 -1 0 0 0



Net profit -877 224 374 457 502


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Table and Charts Reference

Table 1 – ISP 2015E sum of the parts valuation 4

Chart 1 – P/TE 2014E vs 2016E RoTE for Europe’s cash cows 5

Table 2 – ISP CET1 ratio evolution and excess capital indications 5

Table 3 – Q413 P&L results 6

Chart 2 – Q413 Intangible impairment breakdown 7

Chart 3 – Loan loss provisions (LLPs)/ Loans, 2004-2013 8

Chart 4 – Gross inflow of new impaired loans, Q412-Q413 8

Table 4 - Coverage ratio Q413 vs Q313 9

Chart 5 – Breakdown of Book Value, Q413 vs Q313 9

Table 5 – ISP 2017 targets 10

Table 6 - ISP targets vs MBe and Bloomberg consensus 11

Table 7 – ISP Business Plan targets and implied 2013-17E CAGR 12

Table 8 – ISP 2017 target vs optimistic and pessimistic scenarios 12

Table 9 – ISP dividend payout evolution 13

Table 10 – ISP dividend payout evolution 13


Chart 6 – avg 2014-17 payout vs CET1 Basel 3 fully loaded 2015E 15

Chart 7 – avg 2014-17 payout vs 2016E RoTE 16

Chart 8 – 2015 TE/TA vs RoTE 2016 16


Table 13 – ISP vs UCG 19

Table 14 – affordable ISP RWAs stretch in M&A 20

Table 15 – affordable ISP RWAs stretch in M&A 21

Table 16 – Banca dei Territori 22

Table 17 – Corporate and Investment Banking 23

Table 18 – Fideuram 24

Table 19 – Eurizon Capital 25

Table 21 – International Subsidiaries 26

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GENERAL DISCLOSURES

This research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. ("Mediobanca S.p.A."), authorized and supervised by Bank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment and ancillary services (MiFID Directive) and with the implementing law.

Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of this document by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. All reports are disseminated and available to all clients simultaneously through electronic distribution and publication to our internal client websites. The recipient acknowledges that, to the extent permitted by applicable securities laws and regulations, Mediobanca S.p.A. disclaims all liability for providing this research, and accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents. This research report is provided for information purposes only and does not constitute or should not be construed as a provision of investment advice, an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments. It is not intended to represent the conclusive terms and conditions of any security or transaction, nor to notify you of any possible risks, direct or indirect, in undertaking such a transaction. Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Mediobanca S.p.A. recommends that independent advice should be sought, and that investors should make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after consulting their own investment advisers. Unless you notify Mediobanca S.p.A. otherwise, Mediobanca S.p.A. assumes that you have sufficient knowledge, experience and/or professional advice to undertake your own assessment. This research is intended for use only by those professional clients to whom it is made available by Mediobanca S.p.A. The information contained herein, including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Mediobanca S.p.A. considers it to be fair and not misleading. Any opinions or estimates expressed herein reflect the judgment of the author(s) as of the date the research was prepared and are subject to change at any time without notice. Unless otherwise stated, the information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually. Mediobanca S.p.A. may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Mediobanca S.p.A. endorses, recommends or approves any material on the linked page or accessible from it. Mediobanca S.p.A. does not accept responsibility whatsoever for any such material, nor for any consequences of its use. Neither Mediobanca S.p.A. nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error, inaccuracy or incompleteness of fact or opinion in this report or lack of care in its preparation or publication.

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Mediobanca S.p.A. salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.

ADDITIONAL DISCLAIMERS TO U.K. INVESTORS: Mediobanca S.p.A. provides investment services in the UK through a branch established in the UK (as well as directly from its establishment(s) in Italy) pursuant to its passporting rights under applicable EEA Banking and Financial Services Directives and in accordance with applicable Financial Services Authority requirements.

ADDITIONAL DISCLAIMERS TO U.S. INVESTORS: This research report is prepared by Mediobanca S.p.A. and distributed in the United States by Mediobanca Securities USA LLC, which is a wholly owned subsidiary of Mediobanca S.p.A., is a member of Finra and is registered with the US Securities and Exchange Commission. 565 Fifth Avenue - New York NY 10017. Mediobanca Securities USA LLC accepts responsibility for the content of this report. Any US person receiving this report and wishing to effect any transaction in any security discussed in this report should contact Mediobanca Securities USA LLC at 001(212) 991-4745. Please refer to the contact page for additional contact information. All transactions by a US person in the securities mentioned in this report must be effected through Mediobanca Securities USA LLC and not through a non-US affiliate. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. The research analyst(s) are not associated persons of Mediobanca Securities USA LLC and therefore are not subject to NASD rule 2711 and incorporated NYSE rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.

ADDITIONAL DISCLAIMERS TO U.A.E. INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAE Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in the UAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of 1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issued to sophisticated investors.

REGULATORY DISCLOSURES

Mediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employees may effect transactions in the securities described herein for their own account or for the account of others, may have long or short positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior

Disclaimer

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08 April 2014 ◆ 29


management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.

For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link: http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf

Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently specified.

Since 1 July 2013, Mediobanca uses a relative rating system, based on the following judgements: Outperform, Neutral, Underperform and Not Rated.

Outperform (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Neutral (N). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Underperform (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry (team's) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Not Rated (NR). Currently the analyst does not have adequate confidence about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage, on a risk-adjusted basis, over the next 6-12 months. Alternatively, it is applicable pursuant to Mediobanca policy in circumstances when Mediobanca is acting in any advisory capacity in a strategic transaction involving this company or when the company is the target of a tender offer.

Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning / financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.

Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.

Proportion of all recommendations relating to the first quarter:

Outperform Neutral Underperform Not Rated

44.36% 34.34% 20.05% 1.25%

Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the first quarter:

Outperform Neutral Underperform Not Rated

9.6% 5.84% 17.5% 40%

The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please access research reports dated before 1 July 2013 from the restricted part of the "MB Securities" section of the Mediobanca S.p.A. website at www.mediobanca.com.

COMPANY SPECIFIC REGULATORY DISCLOSURES

MARKET MAKER Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are materially represented by equity instruments, issued by INTESA SANPAOLO.

ISSUER REPRESENTATION ON MEDIOBANCA GOVERNING BODIES

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08 April 2014 ◆ 30


Certain members of the governing bodies of INTESA SANPAOLO are also members of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group.

RATING In the past 12 months, the rating on INTESA SANPAOLO has been changed. The previous rating, issued on 30/09/2013, was UNDERPERFORM. The present rating in regard to INTESA SANPAOLO has not been changed since 08/04/2014.

INITIAL COVERAGE INTESA SANPAOLO initial coverage as of 16/04/2007.

COPYRIGHT NOTICE

No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect.

END NOTES

The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian law.

Additional information is available upon request.

Disclaimer

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Mediobanca S.p.A. Antonio Guglielmi

Head of European Equity Research +44 203 0369 570

[email protected] ANALYSTS

European Banks

Alain Tchibozo France/IBK +44 203 0369 573 [email protected]

Alevizos Alevizakos Asset Gatherers/IBK +44 203 0369 574 [email protected]

Alex Tsirigotis Greece/UK +44 203 0369 572 [email protected]

Andrea Filtri Spain/Italy +44 203 0369 571 [email protected]

Andreas Williams Spain +44 203 0369 577 [email protected]

Christopher Wheeler UK/IBK +44 203 0369 575 [email protected]

Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 [email protected]

European Insurance

Marc Thiele Global multi-line, Switzerland and Reinsurance +44 203 0369 584 [email protected]

Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 [email protected]

Andrea Carzana Insurance +44 203 0369 576 [email protected]

Maarten Altena Benelux and UK +44 203 0369 578 [email protected]

Simonetta Chiriotti Nordics +39 02 8829 933 [email protected]

Italian Research

Alessandro Tortora Building Materials/Industrials/Holdings +39 02 8829 673 [email protected]

Alessandro Vinciguerra Utilities +44 203 0369 624 [email protected]

Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 [email protected]

Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 [email protected]

Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 [email protected]

Javier Suárez Utilities +39 028829 036 [email protected]

Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 [email protected]

Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 [email protected]

Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 [email protected]

Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 [email protected]

FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca S.p.A. Charlotte Roden

Head of Equity Sales +44 203 0369 537

[email protected] SALES

Angelo Vietri

+39 02 8829 989 [email protected]

Christopher Seidenfaden


Ivan Simetovic


Lorenzo Angeloni


Timothy Pedroni


European Spec Sales

Gaelle Jarrousse Banks +44 203 0369 530 [email protected]

Carlo Pirri Banks +44 203 0369 531 [email protected]

Gert-Jaap Kraan Insurance +44 203 0369 510 [email protected]

Mediobanca S.p.A. Dominic Bidwell

Head of Equity Trading and Sales Trading +44 203 0369 627

[email protected] SALES/TRADERS

Alessandro Gobbi


Matteo Agrati


Michael Sherry


Roberto Riboldi +39 02 8829 639 [email protected]

FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca Securities USA LLC Pierluigi Gastone

Head of Mediobanca Securities USA LLC +1 212 991 4745

[email protected]

Massimiliano Pula


Robert Perez


Disclaimer

MEDIOBANCA – Banca di Credito Finanziario S.p.A. Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1 33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530

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2014_04_08_isp_the fragrance of cash

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